Morne van Tonder: Financial Director, Pragma Group
The link between a company’s long-term financial plan and its strategic plan are generally well understood. But what about the link to the long-term asset management plan – and does your organisation have one? Asset management and a company’s bottom line is intrinsically linked. Here’s what CFOs need to know about physical asset management in relation to a company’s financial health.
1. Good asset management practices can add up to 30% to your profits
Fixed assets generate money for a business but could cost you money if they’re not running optimally. Poor asset management can drain a budget rapidly, costing a company in both downtime, out of stock issues and expensive repairs. By contrast, we’ve found that regular scheduled maintenance of assets can extend the lifespan of assets by up to three times longer than if they were neglected. This can have a significantly positive effect on your financial results, adding up to 30% to your company’s production capacity and/or profits.
2. Good asset management helps inaccurate forecasting of Capex and Opex
Managing assets properly gives a company knowledge of its assets and this is a powerful tool. Getting a good understanding of their assets is one of the first things we help clients to do. You need to know what assets you’ve got, its condition, how they’re performing, what they’re costing to maintain and what their lifespan is. With this information, it’s easy to know how much operational expenditure is needed in the budget to keep the assets maintained and fully functional. You’ll also be able to forecast when capital expenditure will be required to replace an asset that, even with the best of care, will still at some stage reach the end of its lifespan (cost vs benefit) or need be replaced with up-to-date technology (see point 3 below).
Part of asset knowledge is knowing which assets are business-critical and why. Typically, in the past, this was left to the operational team while the finance team focused on financial reporting and meeting statutory requirements. Nowadays, CFOs can firmly steer a company towards long-term financial resilience simply by knowing as much about the company’s critical assets as anyone else in the business and using this information in the financial plan and forecasts. As a bonus for financial reporting, your depreciation and residual value figures will be more accurate the better you understand the company’s assets.
3. Developments in intelligent technology can add financial value
One of the things we’re excited about at Pragma is the fourth industrial revolution, which will take asset management to a whole new level. Technology that indicates when a part should be replaced, for example, or gives a warning about imminent failure has considerable advantages. The more automated the process, the greater the inherent discipline and the less chance there is of human interference and error. Capitalising on the efficiency and effectiveness offered by advances in technology is a very important part of remaining competitive today.
Acquiring this kind of technology does, of course, mean some upfront capital investments, but it can be planned for. Phasing out older assets and replacing them with sensor-driven technology assets will add value to your operation. Intelligent equipment that gives information and superior performance will be worth more to your company than continuing to spend on maintaining old equipment that doesn’t give essential data.
4. It’s not only about profit
Asset management and a company’s triple bottom line makes beautiful partners. When you’re measuring the full cost of doing business – i.e. not just financial but social and environmental as well – a good asset management plan will yield results in all three areas.
Take an example: in 2018 a transformer exploded at a local warehouse, killing one person and injuring several others. There was a price to this catastrophic asset failure, and it wasn’t only financial. People were affected, and so was the environment.
Increasingly, society expects companies to be socially and environmentally responsible and will respond favourably to those that set the example. Effective asset management will benefit your entire triple bottom line: your profit, the people you employ and the community in which you operate, and the environment.
5. Asset management might lower insurance premiums
This is something you’d need to find out from your insurers. If you’re maintaining your assets through best practices, will your insurance company offer you lower premiums and excesses? Perhaps there’s money to be saved this way – it’s worth finding out!
It’s your move
One of the biggest challenges that organisations face is silo thinking and poor communication across the professional disciplines. But if everyone is invested in the asset management plan, that’s a point of common connection that can drive organisational cohesion. A proactive, informed CFO is in a unique position to champion the organisational need for a regularly updated long term asset management plan. The benefits will go far beyond the numbers.